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If India is to become the third largest economy in the world by 2028, a mere decade from today, dispute resolution and contract enforcement would need very radical improvement. In the World Bank’s ease of doing business index, India has shown great improvement to rank 77 in 2018 from 142 in 2014. However, contract enforcement was India’s worst parameter in both 2014 and 2018.

Its 2018 contract enforcement rank is 163 out of 190 countries, the lowest among G-20 countries. While India has introduced a time limit of 12 months on arbitration, appeals against arbitral awards in high courts and Supreme Court take years, if not decades, to finally get concluded. Lack of contract enforcement and dispute resolution is hurting both governments and businesses in India, especially MSMEs.

Government officials often overlook the sanctity of contract, and seldom make payments as per contract, especially for claims and disputes, until a long-winding court battle is settled. Similarly, the private sector’s cost of doing business increases since contract non-enforcement costs are factored in upfront. Further, in public procurement, gaming the system by unscrupulous bidders is widespread: bid to win, then renegotiate without fear of penalty. This makes it difficult for ethical companies to compete, and produces undesirable outcomes. Indeed, the much-lamented corruption in India is a direct consequence of lack of contract enforcement.

Illustration: Ajit Ninan

In government procurement, there are numerous instances where contracts see lack of performance from the counter parties. In most G-20 countries, government authorities would invoke damages for non-performance and go for a fresh procurement process. This seldom happens in India, for the real risk of getting stuck – the counter party would take the dispute to court, the matter would remain in suspended animation and procurement would not happen. Instead, the authority pragmatically prefers to somehow work with the underperforming counter party, hoping for acceptable outcomes.

Delhi’s poor air quality is in part due to lack of contract enforcement. Under a Supreme Court monitored process, the Kundli-Manesar-Palwal expressway was awarded in 2006 and construction started. However, when work ground to a halt, it took over six years for the government authority to terminate the contract and award the project to another bidder. The project was finally inaugurated in November 2018, and will divert trucks going through Delhi city, improving air quality. But every Delhi resident suffered air pollution for a decade because contract enforcement was delayed.

The Mumbai Trans-Harbour Link bridge would connect the island city to the mainland, leading to many positive outcomes. However, when the project was bid out in 2005, one consortium went to court against being disqualified, while another consortium submitted their bid that was opened and disclosed. After a long process, the disqualified consortium was allowed to submit its bid, an extremely aggressive number. Instead of enforcing contract conditions, the government authority preferred to cancel the entire bid process. At long last, the project has now been awarded.

In Chennai, a third desalination plant was bid out, but a bidding party went to the high court, which stayed the bidder prequalification process for three years. After the court cleared prequalification in 2018, another bidder went to court seeking disqualification of a competitor. There will be undue delay in good water availability for Chennai residents.

National Highways Authority of India (NHAI) enters into a contract called concession agreement (CA) with a private partner called concessionaire, to develop a highway. If there is a termination of contract, NHAI is required under the CA to pay the debt due to bankers within a specified time period. However, this termination payment is almost never seen in practice. NHAI takes the termination dispute into arbitration, and the bank loan proceeds, in stately fashion, towards being classified as NPA.

The Chennai-Tada Tollways Ltd (CTTL) project was awarded in November 2007 after a competitive bid by L&T IDPL. The CA was signed in June 2008 between NHAI and the SPV, CTTL. Loans for CTTL were tied up with IDBI Bank as the lead in a four-bank consortium. Construction started in April 2009, and work completed on all available right of way (land) within the specified 30 months. However, even after six years, 30% of land was not made available by NHAI. This was a condition precedent in the CA, and should have happened by July 2009. Hence the project was terminated in June 2015 and handed over by CTTL to NHAI. After termination, toll is being collected by NHAI and being deposited with IDBI Bank.

However, since NHAI did not abide by the contract condition for making termination payment, IDBI Bank tagged CTTL as a defaulter, for no fault of the concessionaire. Further, the SPV and its holding company suffer reputational loss, as also potential consequences of debarment for acquiring fresh assets under various provisions. Arbitration in this instance is ongoing, and an award may come by May 2019, for a project terminated in June 2015. However, this would almost certainly be appealed against in the high court, and further in the Supreme Court – a dispute that may not be finally resolved even till 2028.

Indian governments and business, especially its legal ecosystem, need to urgently transform contract enforcement and dispute resolution processes, so that all commercial disputes may be resolved within one year at most, including hearing of appeals and final disposal. There are many global best practices, and several professionals who could be roped in to make this happen, if India is serious about its aspirations of becoming the third largest economy by 2028.